Public-pension changes necessary and inevitable
Rich Danker is project director for economics at the American Principles Project in Washington Elected officials across the country are wrestling with a public-employee pension crisis that threatens the ability of states and localities to provide essential services and that has created momentum for desperately needed reform.
is project director for economics at the American Principles Project in Washington
Elected officials across the country are wrestling with a public-employee pension crisis that threatens the ability of states and localities to provide essential services and that has created momentum for desperately needed reform.
The seeds of that momentum can be found in Philadelphia, according to a report released last week by economists at Northwestern University and the University of Rochester. The study notes that the city's pension system is only 26 percent funded and is on pace to run out of money to pay for benefits in five years. Unprincipled government accounting practices are helping to obscure this time bomb.
Mayor Nutter has said the city's defined-benefit plan - which has long been the structure of public-employee pensions - is no longer sustainable and must be replaced with a defined-contribution plan. He also has called for eliminating the costly Deferred Retirement Option Plan (DROP), which allows workers to pick a retirement date up to four years into the future and invest their pension payments in an interest-bearing account while they are still working. The program, introduced in 1999 as a supposedly cost-neutral way of encouraging employees to stay on the job while their successors were trained, costs on average two years of a worker's salary per participant. City Controller Alan Butkovitz has warned, "Ultimately, Philadelphia taxpayers will be forced to foot the bill if this annual drain on the pension fund is allowed to continue."
This populist push to get public workers to let go of some of their benefits for the common good is rupturing Democratic politics. State and local leaders such as Nutter are breaking ranks with unions to start bringing public-employee compensation down to earth.
Mayor Stephanie Rawlings-Blake recently pushed through comprehensive reform in Baltimore, and New York Attorney General Andrew Cuomo is making his fight against pension "padding" a central theme in his gubernatorial campaign. On Election Day, San Francisco voters will decide on a measure that would make city workers shoulder more of their retirement costs.
Democratic politicians are not only responding to dire financial forecasts, but are also wary of popular backlash against what is often seen as an exorbitant level of benefits. According to the New York Times, about 3,700 retired public employees in the Empire State are collecting pensions in excess of $100,000. In California, the tally is more than 15,000 pensioners.
The growing unease over lavish pension payouts and their risk of creating a public-finance catastrophe has already prompted previously unthinkable changes. California Gov. Arnold Schwarzenegger, who said pensions had become "the silent thief of our treasury," held up the state budget for three months to wrestle significant concessions from Democratic lawmakers. Current workers will have to contribute more, the retirement age will be raised, and a benefit increase passed during the boom years in 1999 will be rolled back.
Earlier this year, New Jersey Gov. Christie and the Democratic Legislature made an end run around the state's unions with legislation that rescinds a benefit increase for new workers, moves part-timers into a defined-contribution plan, and makes current employees pay for a portion of their health care. Now he is pushing to eliminate a previously enacted benefit increase and require workers to pay for 30 percent of their health-care costs.
As politically impressive as some of the changes have been, though, they don't go nearly far enough in fixing the pension problems in big states.
California and New Jersey face staggering unfunded liabilities of approximately $550 billion and $173 billion, respectively. They are joined by about 18 other states (including Pennsylvania) with steep deficits that together total $3 trillion in unfunded liabilities.
States and localities will have to become bolder in confronting the problem, and it won't be fixed for good until the defined-benefit model is replaced with the defined-contribution, 401(k)-style one that the federal government adopted long ago. Pennsylvania voters support this kind of reform by 54 percent to 34 percent, according to a poll commissioned by the Commonwealth Foundation in Harrisburg.
The populist appeal of restructuring public-employee pensions - because it benefits the people as a whole rather than a special interest of highly paid government workers - is the glue that will sustain bipartisan cooperation for change. This will likely overcome the pressure that unions can apply in defense of maintaining outsize benefits.
It is up to state and local leaders around the country to get in front of this tailwind and preserve government services for everybody, rather than sacrificing them so a select few benefit.